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World Wrestling Entertainment Inc. (NYSE:WWE)

Q2 2012 Earnings Call

August 01, 2012 09:00 pm ET

Executives

Michael Weitz - SVP, Investor Relations

Vince McMahon - Chairman & CEO

George Barrios - CFO

Analysts

Rick Ingrassia - Roth Capital

Chris Ferris - Noble Financial

Brad Safalow - PAA Research

Robert Ralph - Savings Partners

Jamie Clement - Sidoti & Company

Operator

Welcome to the WWE 2012 second quarter earnings call. My name is John and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will now turn the call over to Michael Weitz, SVP of Investor Relations for WWE.

Michael Weitz

Thank you and good morning everyone. Joining me for today’s discussion are Vince McMahon, our Chairman and CEO; and George Barrios, our CFO. We issued our earnings release earlier this morning and as is our usual practice have posted the release, our earnings presentation and other supporting materials on our website, corporate.wwe.com. These materials can be referenced in conjunction with the discussion today to clarify our performance and to shed light on the trends in the business.

In our discussion today, we will make several forward-looking statements. These statements are based on management estimates. Actual results may differ due to numerous factors, as described in our presentation and in our filings with the SEC. For any non-GAAP financial measures discussed on this call, reconciliations to GAAP measures can be found in our earnings release and in our website presentation.

Today we’ll review our financial results for the second quarter and we’ll follow this review with a Q&A session. At this time, it’s my privilege to turn the call over to Vince.

Vince McMahon

Good morning everyone. I guess it should be noted pretty much in the quarter, we are essentially flat, which is nothing to write on the wall, about 24 million. Results are reflecting pretty much of a profit growth which George will talk about for the most businesses. We have had a strong Pay-Per-View performance which is about a 17% increase which is actually pretty good.

We have had somewhat reduced losses from our movie business and again we are bullish on that and I guess George will reflect some of that as well. We had some decrease in licensing profits because of the absence of a video game which was being produced called All Stars. Somewhat increase in SG&A expense is main staffing.

So it is sort of a reset of a management incentive compensation. I guess may be the key metrics are encouraging, they are a little mixed, but encouraging. Pay-Per-View as I said up 17% which a substantial social media is exploding for us.

Live events remained pretty much flat as well as television ratings, not withstanding a third hour of Raw which just debuted with excellent television ratings and we just did the 1001 Monday television show which is obviously if you know speaks to the staying power of the brand. No television show like it primetime has ever come anywhere near 1001 episodes.

And the third hour is going to give us more all the more exposure in some of the new audience's world to continue to build on the interactive strength of Monday Night Raw. Likewise in October we are going to be producing a one hour television show on ION, it is called Main Event. And we think that that television show will give us an audience that we currently do not have I believe on Wednesday in prime time 8 or 9 o' clock.

We continue as well to distribute and create content for YouTube which is very popular and also gives an opportunity to take some of the television segments on YouTube and perhaps make larger shows out of them. As far as films are concerned we had deals with IM Global, any number of them as we spread out our risk as well as our reward on some of our films in terms of the new philosophy that we have.

We've remastered No Holds Barred which was produced in 1989 and almost forgotten. It's been on the shelf and in terms of the remastering, we have done it really extremely well. We are releasing that and over the last four weeks, we have done (inaudible) very well.

Brand strength. Television strength of Raw is extremely strong, it has been for year after year. As far as Syfy is concerned where Smackdown is on, we are number one, have been since the very first broadcast on Syfy. We've continued, as I mentioned, the explosive growth on social media which we think we've effectively changed not so much the way we do business, but can change the overall impact of our business extraordinarily.

In one year’s time we should be much, much better positioned than we are now on a global front. And I would say, we didn’t make an investment on something called Tout which I will let George explain here in further detail.

International growth, we held live events in Russia which were sold out. In Brazil, which was okay debut, and so one of the things that obviously needs to be talked is the launch of our network. You guys have been very patient in terms of what is it and when is it, and right now you have heard this story for a long time. We're not ready to make an announcement. I feel relatively confident however that next quarter we’ll be making one.

We've just – to make sure that we continue to and we have continued to develop content for it, system implementation and continued negotiation with key distributors. But I hope next quarter I will be making an announcement on our network. So with that in mind, George, I turn it over to you.

George Barrios

Thanks Vince. There are certain key points which I would like to review today. We've included the progress of our strategic initiatives including our investment in talent, our second quarter financial performance and our business outlook for the remainder of this year.

In terms of our strategic initiatives, we made important progress in the second quarter expanding our content and distribution and building our brand strength.

I would like to reiterate this because both these goals are perhaps our most important strategic imperatives. They form the foundation of our future growth. Consistent with these objectives, we announced two new content agreements. Under the first, we will produce and license a third hour of Raw that has already began distribution on USA Network.

Under the second, we will launch a new one hour original series, WWE Main Event for ION Television. As a result of these agreements, we have increased the number of hours of original WWE content that will be aired in prime time on domestic television from four hours per week to six hours per week.

Including the nine original short-form series that we produce for YouTube, this means that during the upcoming fourth quarter, we will create and monetize at least 85 hours of original content compared to 52 hours in the fourth quarter last year. Moreover, we believe we can continue to expand our program for this production and based on the popularity of our brand, monetize our new program in a way that takes advantage of the growing demand for content.

In order to cultivate further the unique passion of our global fans, which underlies the value of our content, we have continued to extend our use of social media. Most recently, we entered a strategic agreement with Tout Industries, a social media technology company which enables users to capture and share 15 second videos.

Integrating fan Touts in our programming, such as the July 16 episode of RAW, it set a precedent for reaching an unheralded level of fan interaction. Our faith in the capability of Tout's content sharing technology, our knowledge of our fans' appetite to engage in this form of communication and our ability to drive usage of the Tout platform led us to invest $5 million in the series B financing installments.

Immediately after making these investments, we featured fan Touts in the July 16th episode of Raw and the social media platforms skyrocketed from number 37 to number 6 in the free photo and video category of the iTunes’ app store. And the cloud app was downloaded more than 30,000 times within hours of our broadcast.

Our experience demonstrates that integrating cloud in our programming can enhance our brand in a unique way, dramatically raise the level of cloud users and perhaps potentially increase the value of our investments.

During the second quarter, as we executed our broader strategy, we continued to manage the positive developments in terms of our fundamental operating metrics. Our pay-per-view business generated double digit year-over-year revenue growth from each of the pay-per-view events in the quarter. In fact, the strong performance of our pay-per-view operations and reduced losses from our film business offset the tough comparisons in our licensing business in our network related investments.

As a reminder, we released the video game WWE All Stars in March 2011, but that release will not be refreshed in 2012. Driven by the improved pay-per-view performance we generated a 5% increase in profit contributions and achieved EBITDA results essentially on par with the prior year quarter.

Excluding the impact of $1.7 million in network related operating expenses and $3.3 million in film impairments in the second quarter of last year, adjusted EBITDA which reflected 7% decline of about $2 million.

For a more detailed review of our performance in the quarter, let's turn to page six of our presentation which lists the revenue and profit contribution by business as compared to the prior year quarter.

Starting with our live events including merchandise sales at these events, revenue was essentially flat in the prior year. The strong performance of WrestleMania was somewhat offset by weak results from our international markets. In North America revenue grew $1.7 million predominantly due to 28% increase in the average ticket price at WrestleMania and an 8% increase in the paid attendance at that event.

The strong performance of WrestleMania was offset by our performance in international markets. These markets experienced a 7% decline in average ticket prices to $63 and a 6% decline in average (inaudible) 6200 fans. These declines were due to the weak attendance of our events in Mexico and to changes in territory mix as we held our first live event in Brazil.

Our market was long-term strategic importance to WWE. Average attendance at our events in Latin America declined approximately 60% to 4,200 fans while the average ticket price for these events declined approximately 15% to $45.03.

Turning to our pay-per-view business, revenue increased 19% or $6.4 million reflecting the 17% increase in buys from our second quarter events. WrestleMania accounted for approximately 60% of this revenue growth with a 15% rise in buys. Revenue from our other second quarter events increased 28%, reflecting a combined 20% increase in buys and a 6% increase in average revenue per buy.

The latter was attributable to higher retail prices charged for viewing our events in high definition. Each of these events generated year-over-year growth in revenue and buys with the growth in buys ranging from 14% to 26%. We believe the improved performance derives both from relatively easy comparisons to our prior year activity and from favorable advantages in our pay-per-view operations. The latter included continued development of our talent base and create story line as well as increased brand awareness that arises from our YouTube programs and social media campaigns.

Revenue from the distribution of our television programming increased by 1% to $32.4 million reflecting additional rights fees and contractual increases inherent in our global TV distribution agreements. These factors more than offset the absence of domestic rights fees from our WWE Superstars program.

During the quarter, we completed and announced two new television distribution agreements, the first agreement extends our RAW program from two to three hours and began in July 23, with the 1000th, episode of that program.

Under the second agreement, we will produce and license a new one hour original series WWE main event ION Television. The new show which will air on Wednesday night at 8 PM will debut on October 3. ION Television is a leading US general entertainment network and since its recent launch in 2008 ION's reach has grown to 100 million households and it has become one of the top 15 TV rated US networks in record time.

In our consumer products segment, our licensing revenue declined by 45% or $5.4 million primarily due to a $4.6 million reduction in video game sales with one released WWE All Stars in the second quarter of this year.

WWE All Stars was released in March 2011 and will not be refreshed in the current year. Although shipping of our franchise video game WWE ‘12 increased 13% in the quarter to 221,000 units. Shipments in a day have declined 23% compared to that in the prior year release.

To-date, royalties from the sales of video games have decline 31%. In the quarter, royalties from the sale of toys declined 12% or [$0.4 million], to-date royalties from the sales of toys have declined 8%.

Industry data suggested domestic sales in the action figure category have fallen 10% to-date in 2012. Our home video revenue increased 4% or [$0.3 million] primarily due to the recognition of minimum guarantees from our international licensing activities. Domestic home video revenue was essentially unchanged from the prior year quarter, a 9% decline in unit shipped and 3% decline in average price per unit to $12.16 was offset by improved sales and rates primarily from prior period releases. The latter we used estimated returns to 39% of gross retail revenue compared to 41% in the second quarter last year.

In our magazine publishing business revenue decreased [$0.3 million] reflecting somewhat lower newsstand sales in the current quarter. Given the significant revenue decline, our magazine publishing has experienced over the last several years and over $15 million in 2008 to less than $7 million over the trailing four quarters, we have reengineered the cost structure of this business so that we can modestly surpass breakeven profit levels with revenue in the range of $5 million to $6 million.

In our digital media segment, revenue increased 26% over $1.6 million to $7.8 million driven by increased rights fees associated with the licensing of original content to YouTube. [Contents] provider under this new agreement included original short form programs with tremendous popular [appeal] such as Backstage Fallout and WWE [Inbox]. Propelled by this programming WWE Fan Nation has become the fourth most watched channel for original content on YouTube since the launch of YouTube's original content channel strategy according (inaudible).

Sales and merchandise on our e-commerce website WWEShop increased 7% or $0.2 million from the prior year quarter. The number of orders increased by 7% to approximately 63,000 and the average revenue per order increased to 4% to $48.70. Effective product merchandising and the absence of these discounts contributed to the change in both orders and the average revenue per order as compared to prior year quarter.

During the quarter, WWE Studios recognized revenue of $ [0.6 million] compared to $4.3 million in the prior year quarter primarily due to the relative performance and timing of releases from our movie portfolio.

There were no new releases in the current year quarter and in the prior year quarter we released “That's What I Am”. In the second quarter last year, lower home video sales anticipated for that movie, resulted in revised ultimate expectations and $3.3 million impairment charge. Excluding the impact of that charge, [sales] losses decreased to $0.5 million from $0.8 million.

In July, we issued a remastered DVD edition of No Holds Barred, originally a 1989 theatrical release produced by WWW starring Hulk Hogan. We’re very pleased with the strong DVD sales achieved in its initial weeks of release. With total cost of less than $100,000 the project is expected to generate a profit of approximately $300,000.

Additionally, over the past few months, we have completed agreements with Pathe, Fox, Lionsgate, IM Global and Troika Pictures to produce and release movies for 2013 and future years. Our first four movies scheduled for release in 2013 exemplify our revised approach to films entertainment.

The first, The Marine Homefront starring WWE superstar, The Miz. This is the third installment of the popular action franchise which has generated the two most profitable movies in our portfolio.

As before, the movie will be co-produced and distributed by Fox. The second anticipated release in 2013, Dead Man Down, is a romantic thriller starring Colin Farrell and featuring WWW superstar Wade Barrett in the supporting role. Dead Man Down is co-produced and co-financed with IM Global and will receive domestic theatrical distribution from FilmDistrict.

The subsequent 2013 release is the The Hive, a thriller starring Halle Berry with WWE Superstar David Otunga in a supporting role. This film is being co-produced with Troika Pictures and will be distributed domestically by Sony Pictures Worldwide Acquisitions.

The fourth movie scheduled for release in 2013, No One Lives is a horror film co-produced and co-financed with Pathe. The movie which stars Luke Evans and features WWE superstar Brodus Clay in supporting role was recently accepted to the opening weekend of the prestigious Toronto International Film Festival and got several screenings as part of the Midnight Madness series, a preeminent program for horror genre and cult cinema.

The strong content and distribution partnerships represented in each of these movies, is indicative of our revised approach to film entertainment. It’s also important to note that WWE is an equity investment and each of these movies would fall within a range of $2 million to $4 million averages approximately 40% of the average investment in our eight previous self distributed films. We anticipate the strength of our production and distribution partnerships including better deal terms will facilitate a much higher rate of return for WWE.

As a reminder the last film produced under our self distributed model Barricade, a thriller starring Eric McCormack will be released in this September. Overall, our profit contribution increased 5% or $2.5 million reflecting better results from most of our businesses. Increased profit from the performance of our pay-per-view operations reduced losses from our movie projects were partially offset by the aforementioned reduction in video game sales.

These factors as well as incremental rights fees for our online programming content contributed to an increase in gross profit margins from 38% to 40%. Excluding the impact of last year’s film impairments, however adjusted profit contribution and margins of approximately $56 million and 40% respectively were essentially flat for the prior year quarter.

For the quarter, SG&A expenses increased 10% to $31.8 million reflecting increased staffing cost, a $1.5 million increase due to the reset of management incentive compensation, including bonus and stock compensation and to a lesser extent increased legal and professional fees. The rise in staffing was incurred primarily to support our potential network. These network related costs reached approximately $1.7 million in the current year quarter. Excluding the impact of these costs adjusted SG&A expenses increased 4% from the prior year quarter.

Page nine of our presentation compares the quarter-over-quarter results and provides a summary of changes by business. As shown, operating income declined 7% or $1.4 million from the prior year quarter. The growth in profit contribution was more than offset by the rise in SG&A expenses and depreciation with the latter predominantly derived from our investment in assets to support the creation and distribution of new content to our potential network. Excluding the impact of network related operating expenses in prior year’s film impairment adjusted operating income declined 12% or $3 million from the prior year quarter.

Net income decreased 15% to $11.9 million due to a rise in our effective tax rate higher, realized losses from foreign exchange transaction and costs associated with our $200 million credit facility. Our effective tax rate of 36% in the current year quarter was negatively impacted by an audit settlement in excess of the previously reserved amount.

In comparison, the effective tax rate of 32% in the prior year quarter was positively impacted by a benefit related to the shutdown of a Canadian subsidiary. Incremental costs associated with our credit facility included the amortization of loan origination costs and a fee related to the unused portion of our revolving credit facility which was established in the third quarter of 2011.

Page 12 of the presentation contains our balance sheet which remained strong. On June 30th, we held $170 million in cash and investments and virtually no debt.

Page 15 shows our free cash flow. For the first six months of the year, we generated approximately $27 million in free cash flow compared to about $33 million in the prior year. The change is primarily due to an increase in capital expenditures which offset the receipt of $7.5 million advance from license fee included in our net cash from operating activities. Capital expenditures increased approximately $12 million as we invested in assets to support our emerging content distribution strategy of our potential network.

We continue to believe that our content investments will yield significant returns under almost any distribution scenario by carefully evaluating our distribution alternatives we can maximize our risk adjusted returns.

We feel very good about the opportunity that our network offers. We are continuing to evaluate a variety of business models where we analyze the optimum approach to distribution, we continue to develop our programming, build production infrastructure and negotiate with top cable, satellite and telco distributors. While we are pleased with our progress, we do not believe it is in the best interest of our shareholders to discuss potential launch dates, the specific business model or the range of anticipated financial outcome at this time.

Based on our earnings growth in the first half of the year and the recent positive trends in our pay-per-view business we are raising our financial forecast for the full year. While developing the transformative opportunity represented by the network, we expect that our 2012 earnings measured by EBITDA earnings per share will be roughly 5% to 15% above our 2000 results on an as reported basis.

As a reminder, film impairments produced net income in the fourth quarter of last year by about $8 million or $0.11 per share. As our first half earnings growth and the absence of our fourth quarter impairment accounted for approximately $12 million increase in net income, reaching 5% to 15% year-over-year earnings growth implied a very tough year-over-year comparison for the upcoming third quarter.

Our third quarter forecast reflects several key components including the reset of management incentive compensation, the ramp up of network related operating expenses, difficult comparison to the prior year home video and pay-per-view profit and increased depreciation expense associated with our investment in network related assets. As indicated in our first quarter earnings call, several of these factors also impact our anticipated growth in the upcoming fourth quarter.

In terms of free cash flow, our expectations have improved somewhat based on our first half operating performance and the timing of projected build spending. However, we continue to anticipate that our full-year 2012 free cash flow will be below our 2011 results.

This forecast includes investment of $10 million to $15 million to produce feature film movie releases and an estimated $30 million to $45 million in support of the network. The latter amount includes investment of $5 million to $10 million to creating new programming content, approximately, $20 million of capital expenditures for facilities and equipment and $10 million to $15 million of operating expenses as previously discussed to provide the broader infrastructure personnel and systems that support these initiatives.

Looking ahead, we believe that by expanding our content and distribution, we can dramatically raise our earnings potential. As I described in previous quarters, this view is anchored by two fundamental promises. First, the WWE brands are among the strongest commercial brands worldwide. Regardless of the metrics that are involved, our social media statistics turned 13 million visitors to our website, the top ratings of our coverage and program, the statistics will all support this conclusion.

In terms of social media, which we view as a critical component of brand presence, our metric has continued to deliver dramatic growth. Since year-end, we've managed a 50% increase in Facebook friends to 72 million and a 65% increase in Twitter followers to 28 million. In the second quarter alone, we had more than 350 million views of WWE videos on YouTube and this presents the only increase with our Tout integration.

The second fundamental premise is that the proliferation of distributional alternatives is driving up the value of content on a global scale, especially compelling content with broad appeal. Based on these factors, we have tremendous confidence that we can take advantage of our developing opportunities.

As evidenced by our recent agreements with the USA, ION Television and YouTube creating new content and distributing that content in traditional and emerging platform is a natural extension of our core competencies. By executing in these areas we can drive unprecedented earnings growth.

That concludes this portion of our call and I will now turn it back to Michael.

Michael Weitz

Thank you, George. John we are ready now, you can open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we have a question from Rick Ingrassia [Roth Capital]. Please go ahead.

Rick Ingrassia - Roth Capital

First of all thanks for the increasing detail on the economics George on specific products and products. I think every quarter your transparency gets better and better and I think that will ultimately help the Street get buying the stock again.

On that point, obviously investors are waiting for more visibility on the CableNET and I know you addressed that issue, can you may be say just a little more about the range of format options and aspects of that network that you are considering.

George Barrios

Rick, I think we have mentioned before I mean three basic models that exist are some sort of broad basic distribution, although there is obviously tiering within that. The second is some sort of Pay TV format and the third will be over the top and I think they all have plusses and minuses and we continue to have discussions both internally and externally on all of those. That’s all we can say at this point.

Rick Ingrassia - Roth Capital

On your Internet traffic in this quarter was quite a bit higher for Q1 than the past, do you think you can sustain it here with the help of a social push or should we expect a little more normalization here in the back half of the year?

George Barrios

We have done a lot of operational backend improvements to the site and if you have done it recently versus few months ago, it jumps out at you. We have done a lot of improvement in the content and we have done a lot of integration of social into the site. And frankly we still think there is a lot of opportunity at the site. Our social is growing a lot quicker than our website and we want to close that gap by bringing up the site's growth. So our hope is that we will continue to see growth there year-over-year.

Rick Ingrassia - Roth Capital

Okay because I meant Q2 spike, not Q1. And finally may be just a refresher on exactly if you can quantify the one-time costs you expect this year related to the cable network and other growth initiatives just so we can get a sense of what the steady state OpEx or fixed OpEx if you will is going forward?

George Barrios

Yeah I mean we are -- obviously at some point we are going to describe this in its full form which will describe both the OpEx, CapEx to support the initiative long term. For this year what we have said is we are going to spend around $5 million to $10 million of cost on programming to capitalize on the balance sheet and to date we have got about $5 million, the biggest of that is for Legends' House which is roughly 70% of that capitalized asset.

The second piece is CapEx and we have said roughly $20 million would be spent this year and most of which has already been spent. And then on an OpEx basis, we said about $10 million to $15 million and the range of motion there is primarily on the marketing spend. We know what we think the steady state marketing spend is for a network, how much of it gets spent this year is going to be depend on launch timing.

So there is a variability there. We have spent $4 million in OpEx on the network through the first half of the year and it will be ramping up through the remainder of the year. My guess is to get to that $10 million to $15 million, we spend about $4 million. That's about another $10 million to go, so you can see it. So it's probably a $4 million to $5 million run rate in the third and fourth quarter.

But again to be completely transparent, there is variability there depending on how much we choose to spend on marketing. What's less variable and more controllable is the staffing technology facilities and so on and that got pretty bit handle on for the rest of the year.

Rick Ingrassia - Roth Capital

And then going forward amount for the network for 2013 or maybe say 2014, when it’s been in operation for you?

George Barrios

Yeah I mean I think it makes sense to put that number in context of the revenue model, but we discussed that. I think to throe that number out without that wouldn’t make a lot of sense for anyone. So when we talk about the revenue model, we'll obviously talk about the expense model and the investment model.

Operator

Our next question is from Michael Kupinski. Please go ahead.

Chris Ferris - Noble Financial

This is Chris Ferris on for Michael Kupinski. A quick question on Pay-Per-View, which was nice, pretty strong in the quarter. Can you talk about what drove that mix versus price? How much of it was price and how much of it was the increased number of buys and then you had the same number of events in the quarter. So how did you really drive that growth and how much marketing muscle did you have to put behind it?

George Barrios

I'll talk about the pure economics of it. And maybe Vince can touch the creative elements of it, but on pure economics and mix issues, I'll separate WrestleMania and then all the others and then combine them.

So WrestleMania buys were up about 15% and WrestleMania ASP was up about 1% roughly.

All the buy, all the other events had increases of 20% on the buy number and about 6% on the ASP and most of the growth on the ASP was driven by shifts in home in high-def purchases. So our high-def Pay-Per-Views have about a $10 upcharge on them and we've gone from roughly 27% of our buys last year-to-date being HD to roughly 34% now. So you know, about a 25% slight. So that’s what drove it.

When you combined WrestleMania and other events, you see we’re up about 17% in buys for the in period events and then the ASP was up about 2%. Does that help on the mechanics?

Chris Ferris - Noble Financial

And then just, what about from a marketing perspective, was there any incremental cost to getting these buys or is it just really what you just detailed there, particularly the HD.

George Barrios

Well I told you the easy stuff. I think the creative was great. WrestleMania was amazing and so I think that really is what drove it, the contents, the talents. And so from a pure marketing spend or marketing was essentially flat year-over-year roughly for all the events. So the marketing obviously is a huge part of it, but it wasn’t necessarily more than last year.

Chris Ferris - Noble Financial

And then a quick question on the attendance, down slightly you know. Can you talk a little bit about what's happening there and what sort of the dynamics are in attendance in North America I mean?

George Barrios

I mean, attendance is always tough just because you are in different territories quarter-over-quarter. So it's hard to make precise comparisons. I think when we peel it back, you know, our Smackdown brand is probably a little bit behind where we would like it to be and that's pulling down the attendance number.

But we’re feeling good about some of the things that we've done, both on the creative side and also on the production side. We've actually invested quite a bit to improve the production values of our live events which are different than – when we use that term live events, it's different than our televised events and our Pay-Per-Views and the production values that are amazing. But we've tried to close that gap with our pure live events.

So you know, we feel better if the numbers were higher, but right now we're viewing it as essentially status quo, no big trends up or down. And some of it is territory mix as I mentioned before.

Chris Ferris - Noble Financial

And then one last question. You highlighted some of the really impressive online statistics, social media metrics, you know, particularly the YouTube views. Is there any sense and you are getting so much engagement online in social media, but is there any sense of how you are really being able to monetize that. So if am watching something from WWE on YouTube, is that cannibalizing your television viewership or do view that as additive for example?

Vince McMahon

Not, it's all enhancement. I mean it is all additive. There is an insatiable thirst for the Jabra. And we are the Jabra. So in so many different respect, with an audience humor, which is obviously something YouTube stuff or whether or not, it's more of a dramatic variety show they do on television and adding the third hour on Raw gives us a broad audience as well and it's difficult to change their viewing habits but nonetheless normally someone is accustomed to tuning into Raw at 9 O'clock, it's been that way for many, many years.

So the 8 O'clock hour gives us somewhat of a new audience and a broader spectrum to promote everything, pay-per-view, you name it. Likewise from an international standpoint you have to capitalize on that extra hour. It is quite substantial notwithstanding the fact that we have deals already in place and much like everyone else we have an annual budget, you can't get that much out of one hour yet until the deals come up to speed and open again.

So and again on the notwithstanding that the extra hour we are going to be producing for ION on that too is available for international growth on an extraordinary basis but again we add certain contracts in certain areas like the United Kingdom in which they max out in terms of their budget. When those deals come up, we will be able to capitalize substantially, you know what those two extra hours even on an international basis but there's so much demand for individual brands as well as the overall brand and so many different directions, there is an insatiable appetite. If we do our jobs well insatiable appetites where we are going to go.

Operator

Our next question is from Brad Safalow.

Brad Safalow - PAA Research

First question, what is your percentage ownership in Tout?

George Barrios

We haven't disclosed that. We are just disclosing the investment amount.

Brad Safalow - PAA Research

Okay so that's not even going to appear in your [queue].

George Barrios

No, not a percentage.

Brad Safalow - PAA Research

Okay. And then I just want to clarify something on the film side, you said $10 million to $15 million; I just want to make clear is that for the rest of the year for second half of ’12 or is that for the full year?

George Barrios

Yeah I could have been clear. Our guidance at the beginning of the year was $15 million to $25 million and we've reset it to $10 million to $15 million for the full year.

The other thing I would say on the channel investment one of the things that is in the [queue] is that we will be accounting for using the cost method which implies something on some level of ownership.

Brad Safalow - PAA Research

Just on the $10 million to $15 million, is that just a timing you are seeing in some levels, some of the spend will go into ’13 or is there just a change in your overall investment?

George Barrios

No, we will give guidance obviously for 2013 and there are two elements to any amount of the spend, some of it is spent to produce now and some of it is spent that in such we are committing to later. So when I am talking about the $10 million to $15 million that's actually cash from this year that will go towards film investments. When we started the year at $15 million to $25 million. That was our goal, filling the pipeline with projects that we think have the creative potential, frame enhancement potential and the financial return that we are looking for. It ended up that we now think $10 million to $15 million for this year.

Brad Safalow - PAA Research

And then just coming back to the great progress on the social media site, what are outside of looking at your Facebook fans, your Twitter followers where do you expect to see the most immediate impact on your business?

George Barrios

Look, I mean at the end, WWE has always been about this great content and promoting it and social media is the next generation of how you interact with fans. So a lot of ways we've been social over 20 years you know, if you go to any of our shows you see social element to the way our fans interact with our content. This is the new generation of that.

So it’s sometimes hard to draw the direct line obviously you can talk about monetizing and there will be some of that I believe as we go forward. But I think the bigger win is just enhancing the brand and engaging with our audience and then that ripples through everything. So unfortunately it's not me, (inaudible) where you need direct line I think it’s actually second order benefits for the most part. There will be some of that direct but might be with just it’s more about driving the brand awareness.

Brad Safalow - PAA Research

In terms of engagement I think 60% to 70% of your social media followers are overseas. Are you seeing any enhancement in the ratings across there are so many markets there, do you see any benefit there yet or is that something that we should even think about?

George Barrios

Well we think about it. I think ratings international and you probably know here in the US we have got a nice structured approach to measuring television ratings and even online, getting some levels of data. Internationally it’s different, so we get ratings from our top 20 markets, different formats so and so forth, it’s hard to see that there has been a direct correlation on the ratings but what’s not hard to see is the engagement that’s been mentioned, and it’s on a global level. And even when you just take the Tout investment out since the global platform given that it’s on IOS and Android and so on but all those numbers that we talked about where on the global level. And so we believe one of the reasons we made an investment is we thought we could grow the global profile so their technology can help us and we can help them and we certainly want share in some of that potential upside. So the same answer to your first question is we are seeing engagement broadly it’s hard to draw direct line on them.

Brad Safalow - PAA Research

Okay. And then any update on Superstars or NXT?

George Barrios

Well Superstars and NXT continue to be produced and monetized internationally. NXT has had our fairly fundamental change in how it’s produced and it used to be produced at our television production on Mondays and Tuesdays. It's now has been moved down to Orlando, Florida in partnership with Full Sail University which is the university that specializes in developing talented professionals in digital provisional media. So we are actually filming the shows they are at a stage that they have and it has been going real well and the show looks great. We are getting to get a lot of good young talent to work on the show and I think Full Sail is benefiting it from having their students work on one of the best produced shows on TV.

Brad Safalow - PAA Research

Okay so on in term so of distribution now?

George Barrios

Domestically, Superstars and NXT are not licensed. They are continued to be licensed internationally and that may change going forward but that’s the way out right now.

Brad Safalow - PAA Research

And just on the last question on the network. Obviously, a lot of stock price reach as far as I can tell is based only on the uncertainties surrounding the network and you guys appreciate that and probably incredibly frustrated as every shareholder probably is, what can you tell us more at least about what the programming slate looks I mean how your are reconstituting a lot of older content and kind of refreshing it, and you talk a little bit about that we know about the Legend House but we don’t know anything else that I think that's heart of the reason why people are so concerned about your spend relative to the potential economic opportunity?

George Barrios

Yeah I mean the slate obviously for it to be the level of transformation that we want and it's got to be compelling and we think we have some compelling content. We talked about some of it. You mentioned Legend House our guess our plan there will be some there element like programming on the network as well as and you know, when you describe is reconstituting some of our library. I think it doesn’t do a justice. Obviously, we do have a massive library. We own 100% of that IP we digitalized about 30,000 hours but we’re creating fresh new content around that.

So for example, one of the kind of coolest time periods in WWE history was the real live battle between WWE and WCW back in the 90’s and the business battles between Vince McMahon and [Trump]. We developed a really compelling series around that, called the Monday Night War, that my guess will be on the WWE network and it's programming like that, real original compelling content that will be on there. There are some other things, that we can’t talk about all of it but our goal is to make the WWE network an absolute must have for our fans.

Brad Safalow - PAA Research

Okay, I'll just say this as a shareholder, you guys need to say more than you have, its frustrating towards the stock. And I think you can do better for shareholders in your communication. I understand this. About the distribution, I can understand your sensitivity there but at least help us understand what that content would look like when it release, I think some people comfort as to why this is a good investment for the company?

Vince McMahon

I am quite confident. On the next earnings call, we will have a lot more clarity for you.

Operator

Next question is from Robert Ralph. Please go ahead.

Robert Ralph - Savings Partners

Couple of quick ones. You just mentioned about your library how much have you digitalized. Could you give us a sense of how big the library is now, obviously it's not the on balance sheet or anything, so it's hidden asset. And given the arguments to something on the network side, are we going to see an increase per year in the amount of hours of program that you plan to create above and beyond what you currently do now with the lot of events every week?

George Barrios

So I am not sure I understood the second part. The first part, first question on the library, it’s about a 100,000 hours in total and we digitized about 30,000 hours; and I am sure I not understood the second question.

Robert Ralph - Savings Partners

Well, as far as once you do something on the network side, do you plan to increase the number of hours of original program that you as WWE are going to produce every year or your annual spend or is it going to be relatively similar to hours that's been in the past?

George Barrios

Well, we are going to, we are going to produce the amount of content that we think is make sense economically. I mean Vince talked about it before, and the data supports it, when we had more hours of television programming domestically our unduplicated number of viewers has grown, so the concept of applies one cannibalizing the other, we haven't seen that in the data. So we think the best way to grow the brand and also to grow our economics is get compelling content on the air in both traditional formats and new formats including the network. Exactly, how many hours, I think that's something that we will talk about as we move forward. But, we are bullish on the value of content long-term.

Robert Ralph - Savings Partners

And then as a follow-up to kind of that answer, obviously if you, you know a few quarters back you changed the name of the company to WWE, now World Wrestling Entertainment, as the goal was do to more than just a wrestling company, but a fully integrated diversified media company. And obviously you made some great strides there you know obviously WWE series as a few years ago, got you into a different line of business.

But since then there really hasn't been anything else other than wrestling I think investors could see, I wonder if you can just try to (inaudible) in terms of what other opportunities you see when you can take the brand and the infrastructure that you created and you own all of and where the opportunities lie in other areas to make WWE more of a diversified media company as opposed to what people today view as predominantly a wrestling company?

Vince McMahon

Well, obviously film has been a project for us and we think we finally have the correct formula you know with that, but it makes us somewhat different there. We are -- our company is so flexible and so valuable that there is no form of entertainment that we cannot quite frankly reach.

There is, from a media standpoint we do even more than Disney, because Disney got to do pay-per-view we go everywhere. We are on social media, we’re now in DVD business no matter what it is, the magazine business, we are into everything and to get as the platform to be able to spend things on much like Legends House which is a reality show; we did Tough Enough which was a reality show and which did extremely well in the ratings.

So it’s things like that we have our overall brand and then you have quite frankly individual brands that are part of John Cena brand, there are many things like that in terms of capitalizing on the individual brands on a national and international basis. So we are rich in terms of the things we can do.

When you look at what we do now on Monday nights and on Friday nights it’s a variety show. There is nothing like it in the world, sure there is wrestling in the ring, but it’s a variety show to be able to expand some of that variety in terms of drama, in terms of I’ll it comedy and it’s more of a humor and music, things like that we do it all. It’s just an expansion of some of the elements we have in variety show every Monday and Friday.

Robert Ralph - Savings Partners

Okay, great. Let me – well I have come to realize, what you do in individual business lines, it could be leveraged with other partner or internally and obviously you look at stock price for that as of yet. And finally just last question, given stock pricing and given the free cash that you have, and obviously increasing guidance you mentioned today, how do think data security should value the company? Do you think there is a multiple of free cash flow making more sense, earnings makes more sense? The enterprise value to -- what would you think the best way would be to capture the true value of WWE is for the investment community?

George Barrios

Yeah, I think models on expected cash flow are the best fundamental best measure of the business. I think the stock price today reflects a couple of things and Vince has touched on and I think we had one of course before mentioned here. I think the earnings that we had last year and obviously primarily driven by the film impairments. So that brought us from a $95 million, which was all time high in 2010 to below 50s in EBITDA. I think that looks fairly giant for all of us.

And then we overhang on films and lack of knowledge on the network are making people uncomfortable and I think we have to show on the former that we can execute; we feel great I talked about it, Vince talked about it little bit earlier, the partnerships that we have, the content looks the best thing, how we're managing the risk fundamentally different than what we did with the self distributed models. So we feel good about that, but we also know we got to deliver and we got to show people we can we can deliver.

And then on the network, I think it’s a slightly different band, I think its more laying out the full business model which we run to right now, but we think make sense a whole back a little bit and then delivering on that. So my view, as we value the company and expecting cash flow and I think once we get those things that I mentioned behind us, I think investors will be going to feel good about where the company is and where it's going.

Operator

Our last question is from Jamie Clement [Sidoti & Company]. Please go ahead.

Jamie Clement - Sidoti & Company

Vince, I was wondering if I can ask you a question on the creative front. It seems to me and please correct me if I am wrong, it seems like Raw and some of your pay-per-views have gotten in a little edgier again from a content perspective. I know PG is important to you, but has there been any intentional move to kind of bring back some of the double (inaudible) and that kind of the thing back from the Monday nights or days and those sorts of things. I know Val Venis may not be coming back anytime soon, but you know, are you understanding what I am asking right?

Vince McMahon

I do and I think it is an evolvement. I think that the writing of the shows is just considerably better. There are subject matters in which there are no subject matter that we really can’t touch upon these days, but doing in a more sophisticated, acceptable PG manner. When you look at what PG means, I think we have been more on the G side than on the P side. So, there is an expansion to remain PG un-question. It opened up so many doors in such a broader platform for us, you know, on a national and international basis, but within that environment, you can stretch certain segments and things of that nature without going all the way back to TV-14

Jamie Clement - Sidoti & Company

But do you feel like you’ve been doing a better job on the P front maybe in recent months that you have, you know, do you think maybe you took it too far to the G level on Monday nights?

Vince McMahon

I would say that’s pretty fair.

Michael Weitz

I believe that was our last question, is that correct John?

Operator

Yes, it is. I'll turn it back over to you for any closing remarks.

Michael Weitz

Thank you everybody. We appreciate you listening to the call today. If you have any questions please don't hesitate to reach out to us. Thank you.

Vince McMahon

Thanks.

Operator

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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